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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2006
COMMISSION FILE NO. 001-12561
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BELDEN CDT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 36-3601505
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7701 FORSYTH BOULEVARD, SUITE 800
ST. LOUIS, MISSOURI 63105
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(314) 854-8000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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The registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Act during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
The registrant is a large accelerated filer and is not a shell company.
Following is the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 31, 2006
----- ----------------------------
Common Stock, $0.01 Par Value 43,442,584
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Exhibit Index on Page 26 Page 1 of 27
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BELDEN CDT INC.
CONSOLIDATED BALANCE SHEETS
JUNE 25, 2006 DECEMBER 31, 2005
------------- -----------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 195,784 $ 134,638
Receivables 240,292 174,360
Inventories 268,536 245,481
Deferred income taxes 27,839 27,845
Other current assets 6,341 8,015
Current assets of discontinued operations -- 56,997
---------- -----------
Total current assets 738,792 647,336
Property, plant and equipment, less accumulated depreciation 280,572 287,778
Goodwill, less accumulated amortization 273,882 272,290
Other intangibles, less accumulated amortization 71,873 72,459
Other long-lived assets 17,968 6,214
---------- -----------
$1,383,087 $ 1,286,077
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 223,730 $ 196,078
Current maturities of long-term debt 59,054 59,000
Current liabilities of discontinued operations 463 13,342
---------- -----------
Total current liabilities 283,247 268,420
Long-term debt 172,000 172,051
Postretirement benefits other than pensions 34,450 33,167
Deferred income taxes 81,104 73,851
Other long-term liabilities 18,121 17,166
Minority interest 8,796 7,914
Stockholders' equity:
Preferred stock -- --
Common stock 503 503
Additional paid-in capital 567,112 540,430
Retained earnings 317,393 290,870
Accumulated other comprehensive income (loss) 11,750 (6,881)
Unearned deferred compensation -- (336)
Treasury stock (111,389) (111,078)
---------- -----------
Total stockholders' equity 785,369 713,508
---------- -----------
$1,383,087 $ 1,286,077
========== ===========
The accompanying notes are an integral part of these
Consolidated Financial Statements
-1-
BELDEN CDT INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- ---------------------
JUNE 25, JUNE 26, JUNE 25, JUNE 26,
2006 2005 2006 2005
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $ 409,568 $ 311,438 $ 731,473 $ 597,706
Cost of sales (317,391) (239,162) (565,881) (462,645)
--------- --------- --------- ---------
Gross profit 92,177 72,276 165,592 135,061
Selling, general and administrative expenses (53,013) (55,917) (99,472) (104,051)
Asset impairment (2,361) -- (2,361) --
--------- --------- --------- ---------
Operating income 36,803 16,359 63,759 31,010
Interest expense (3,701) (3,918) (7,493) (7,676)
Interest income 1,644 1,318 2,639 2,074
Minority interest (252) (169) (469) (336)
--------- --------- --------- ---------
Income from continuing operations before taxes 34,494 13,590 58,436 25,072
Income tax expense (12,970) (4,732) (21,972) (8,832)
--------- --------- --------- ---------
Income from continuing operations 21,524 8,858 36,464 16,240
Gain (loss) from discontinued operations,
net of tax (Note 3) -- 1,144 (1,330) 405
Gain (loss) on disposal of discontinued
operations, net of tax (Note 3) -- 8,763 (4,298) 15,163
--------- --------- --------- ---------
Net income $ 21,524 $ 18,765 $ 30,836 $ 31,808
========= ========= ========= =========
Weighted average number of common
shares and equivalents:
Basic 43,036 46,971 42,801 46,989
Diluted 50,026 53,472 49,679 53,568
Basic income (loss) per share:
Continuing operations $ 0.50 $ 0.19 $ 0.85 $ 0.35
Discontinued operations -- 0.02 (0.03) 0.01
Disposal of discontinued operations -- 0.19 (0.10) 0.32
Net income 0.50 0.40 0.72 0.68
Diluted income (loss) per share:
Continuing operations $ 0.44 $ 0.18 $ 0.76 $ 0.33
Discontinued operations -- 0.02 (0.03) 0.01
Disposal of discontinued operations -- 0.16 (0.08) 0.28
Net income 0.44 0.36 0.65 0.62
Dividends declared per share $ 0.05 $ 0.05 $ 0.10 $ 0.10
Reconciliation between net income and
comprehensive income:
Net income $ 21,524 $ 18,765 $ 30,836 $ 31,808
Adjustments to translation component of equity 13,392 (16,002) 18,784 (30,645)
Adjustments to minimum pension liability (107) 96 (153) 203
--------- --------- --------- ---------
Comprehensive income $ 34,809 $ 2,859 $ 49,467 $ 1,366
========= ========= ========= =========
The accompanying notes are an integral part of these Consolidated
Financial Statements
-2-
BELDEN CDT INC.
CONSOLIDATED CASH FLOW STATEMENTS
(UNAUDITED)
SIX MONTHS ENDED
--------------------
JUNE 25, JUNE 26,
2006 2005
--------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 30,836 $ 31,808
Adjustments to reconcile net income to net cash used for operating
activities:
Depreciation and amortization 21,300 18,736
Asset impairment 2,361 --
Deferred income tax expense 12,416 7,057
Pension funding in excess of pension expense (17,146) (5,130)
Share-based compensation 2,246 1,401
Loss (gain) on disposal of tangible assets 6,319 (23,692)
Changes in operating assets and liabilities, net of the effects of
currency exchange rate changes:
Receivables (58,327) (26,951)
Inventories (18,943) (14,406)
Accounts payable and accrued liabilities 27,734 32,866
Other assets and liabilities, net 7,449 8,565
-------- --------
Net cash provided by operating activities 16,245 30,254
Cash flows from investing activities:
Proceeds from disposal of tangible assets 30,153 36,894
Capital expenditures (7,280) (13,690)
-------- --------
Net cash provided by investing activities 22,873 23,204
Cash flows from financing activities:
Proceeds from exercise of stock options 20,793 2,528
Excess tax benefits related to share-based compensation 3,668 --
Cash dividends paid (4,313) (4,731)
Debt issuance costs (1,063) --
Share repurchase program payments -- (14,654)
Payments under borrowing arrangements -- (1,986)
-------- --------
Net cash provided by (used for) financing activities 19,085 (18,843)
Effect of foreign currency exchange rate changes on cash and cash equivalents 2,943 (2,906)
-------- --------
Increase in cash and cash equivalents 61,146 31,709
Cash and cash equivalents, beginning of period 134,638 188,798
-------- --------
Cash and cash equivalents, end of period $195,784 $220,507
======== ========
The accompanying notes are an integral part of these Consolidated
Financial Statements
-3-
BELDEN CDT INC.
CONSOLIDATED STOCKHOLDERS' EQUITY STATEMENTS
SIX MONTHS ENDED JUNE 25, 2006 AND JUNE 26, 2005
(UNAUDITED)
ACCUMULATED
COMMON STOCK TREASURY SHARES UNEARNED OTHER
-------------- PAID-IN RETAINED ----------------- DEFERRED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT COMPENSATION INCOME (LOSS) TOTAL
------ ------ -------- -------- ------ --------- ------------ ------------- --------
(IN THOUSANDS)
Balance at December 31, 2004 50,211 $502 $531,984 $252,114 (3,009) $ -- $(2,462) $ 27,862 $810,000
Net income 31,808 31,808
Foreign currency translation (30,645) (30,645)
Minimum pension liability 203 203
--------
Comprehensive income 1,366
Exercise of stock options 122 1 2,614 29 (87) 2,528
Share-based compensation 188 10 -- 188
Forfeiture of stock by incentive
plan participants in lieu of
cash payment of individual
tax liabilities related to
share-based compensation (13) (265) (265)
Share repurchase program (713) (14,654) (14,654)
Amortization of unearned
deferred compensation 1,478 1,478
Cash dividends ($.05 per share) (4,731) (4,731)
Other 386 314 700
------ ---- -------- -------- ------ --------- ------- -------- --------
Balance at June 26, 2005 50,333 $503 $535,172 $279,505 (3,696) $ (15,006) $ (984) $ (2,580) $796,610
====== ==== ======== ======== ====== ========= ======= ======== ========
Balance at December 31, 2005 50,346 $503 $540,430 $290,870 (8,010) $(111,078) $ (336) $ (6,881) $713,508
Net income 30,836 30,836
Foreign currency translation 18,784 18,784
Minimum pension liability (153) (153)
--------
Comprehensive income 49,467
Exercise of stock options 20,949 1,040 (156) 20,793
Share-based compensation 6,298 13 229 6,527
Forfeiture of stock by incentive
plan participants in lieu of
cash payment of individual
tax liabilities related to
share-based compensation (11) (229) (4) (384) (613)
Adoption of SFAS No. 123(R) (336) 336 --
Cash dividends ($.05 per share) (4,313) (4,313)
------ ---- -------- -------- ------ --------- ------- -------- --------
Balance at June 25, 2006 50,335 $503 $567,112 $317,393 (6,961) $(111,389) $ -- $ 11,750 $785,369
====== ==== ======== ======== ====== ========= ======= ======== ========
The accompanying notes are an integral part of these
Consolidated Financial Statements
-4-
BELDEN CDT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Consolidated Financial Statements include Belden CDT Inc. and
all of its subsidiaries (the COMPANY, US, WE, or OUR). We eliminate all
significant affiliate accounts and transactions in consolidation.
The accompanying Consolidated Financial Statements presented as of any date
other than December 31, 2005:
- Are prepared from the books and records without audit, and
- Are prepared in accordance with the instructions to Form 10-Q and do
not include all of the information required by accounting principles
generally accepted in the United States for complete statements, but
- Include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial
statements.
These Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and Supplementary Data contained in our Annual
Report on Form 10-K for the year ended December 31, 2005.
Reporting Periods
Our fiscal year and fiscal fourth quarter both end on December 31. Our fiscal
first, second and third quarter each end on the last Sunday falling on or before
their respective calendar quarter-end.
Impact of Newly Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board issued Interpretation No.
48, Accounting for Uncertainty in Income Taxes--an interpretation of FASB
Statement No. 109. This Interpretation clarifies the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The Interpretation
is effective for fiscal years beginning after December 15, 2006. We will adopt
this Interpretation effective January 1, 2007 and are currently in the process
of evaluating the method of adoption and the impact that adoption of this
Interpretation will have on our operating results, cash flows and financial
condition.
-5-
NOTE 2: OPERATING SEGMENTS
During the first quarter of 2006, we announced organizational changes that
resulted in a change in our reportable segments. We now conduct our operations
through four reportable segments--the Belden Americas segment, the Specialty
Products segment, the Europe segment, and the Asia Pacific segment. We have
reclassified prior year segment disclosures to conform to the new segment
presentation.
We evaluate segment performance and allocate resources based on operating
income. Operating income of the segments includes all the ongoing costs of
operations, but excludes interest and income taxes. Allocations to or from these
segments are not significant. Transactions between the segments are conducted on
an arms-length basis. With the exception of unallocated goodwill, certain
unallocated tax assets, and tangible assets located at the corporate
headquarters, substantially all of our assets are utilized by the segments.
Operating Segment Information
Finance and administration costs reflected in the column entitled F&A in the
tables below represent corporate headquarters operating, treasury and income tax
expenses. Amounts reflected in the column entitled Eliminations in the tables
below represent the eliminations of affiliate revenues and affiliate cost of
sales.
BELDEN SPECIALTY ASIA
AMERICAS PRODUCTS EUROPE PACIFIC F&A ELIMINATIONS TOTAL
-------- --------- -------- -------- -------- ------------ --------
(IN THOUSANDS)
THREE MONTHS ENDED JUNE 25, 2006
External customer revenues $219,830 $ 73,582 $100,501 $15,655 $ -- $ -- $409,568
Affiliate revenues 18,802 8,845 1,873 -- -- (29,520) --
Operating income (loss) 37,796 9,498 69 1,480 (6,776) (5,264) 36,803
THREE MONTHS ENDED JUNE 26, 2005
External customer revenues $152,238 $ 61,950 $ 84,425 $12,825 $ -- $ -- $311,438
Affiliate revenues 23,435 4,038 2,925 -- -- (30,398) --
Operating income (loss) 20,912 8,622 2,748 434 (11,482) (4,875) 16,359
SIX MONTHS ENDED JUNE 25, 2006
External customer revenues $395,196 $134,300 $173,513 $28,464 $ -- $ -- $731,473
Affiliate revenues 33,714 14,215 4,009 -- -- (51,938) --
Operating income (loss) 68,829 16,400 (1,071) 2,933 (13,041) (10,291) 63,759
SIX MONTHS ENDED JUNE 26, 2005
External customer revenues $294,659 $115,870 $163,372 $23,805 $ -- $ -- $597,706
Affiliate revenues 41,400 8,092 4,527 -- -- (54,019) --
Operating income (loss) 37,556 16,050 3,467 529 (17,434) (9,158) 31,010
-6-
The following table is a reconciliation of the total of the reportable segments'
operating income to consolidated income from continuing operations before taxes:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 25, JUNE 26, JUNE 25, JUNE 26,
2006 2005 2006 2005
-------- -------- -------- --------
(IN THOUSANDS)
Operating income $36,803 $16,359 $63,759 $31,010
Interest expense (3,701) (3,918) (7,493) (7,676)
Interest income 1,644 1,318 2,639 2,074
Minority interest (252) (169) (469) (336)
------- ------- ------- -------
Income from continuing operations before taxes $34,494 $13,590 $58,436 $25,072
======= ======= ======= =======
NOTE 3: DISCONTINUED OPERATIONS
In the first half of 2006, we sold certain assets and liabilities of our
telecommunications cable operation in Manchester, United Kingdom for
approximately $28.6 million cash and terminated, without penalty, our supply
agreement with British Telecom plc. We recognized a $4.3 million after-tax loss
on the disposal of this discontinued operation.
During 2005, we sold substantially all of the remaining assets of our
discontinued operations in Phoenix, Arizona; Skelmersdale, United Kingdom;
Auburn, Massachusetts; and Barberton, Ohio, for approximately $40.0 million
cash. We recognized a $15.2 million after-tax gain (which included an $8.8
million after-tax gain in the second quarter of 2005) on the disposal of the
discontinued operation in Phoenix, Arizona. The other three discontinued
operations were acquired through the 2004 merger between Belden Inc. and Cable
Design Technologies Corporation (CDT). The net proceeds received from the sales
of certain assets of these three discontinued operations exceeded the carrying
values of the assets by $0.1 million. Upon the finalization of purchase
accounting, we increased the portion of consideration we previously allocated to
the tangible assets of these discontinued operations and reduced the portion of
consideration we previously allocated to goodwill by this excess amount.
Results from discontinued operations include the following revenues, income
(loss) before taxes and income tax benefit (expense):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 25, JUNE 26, JUNE 25, JUNE 26,
2006 2005 2006 2005
-------- -------- -------- --------
(IN THOUSANDS)
Revenues $-- $26,370 $27,644 $51,197
Income (loss) before taxes -- 1,543 (1,900) 337
Income tax benefit (expense) -- (399) 570 68
Net income (loss) -- 1,144 (1,330) 405
Gain (loss) from disposal of discontinued operations includes the following gain
(loss) before taxes and income tax benefit (expense):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 25, JUNE 26, JUNE 25, JUNE 26,
2006 2005 2006 2005
-------- -------- -------- --------
(IN THOUSANDS)
Gain (loss) before taxes $-- $13,692 $(6,140) $23,692
Income tax benefit (expense) -- (4,929) 1,842 (8,529)
Net gain (loss) -- 8,763 (4,298) 15,163
-7-
At June 25, 2006, the only assets or liabilities belonging to the discontinued
operations that remained were accrued liabilities related to our discontinued
operation in Phoenix, Arizona totaling $0.5 million.
We have included a tabular analysis of 2006 severance and other termination
benefits activity related to the discontinued operations in Note 7, Accrued
Severance and Other Termination Benefits.
NOTE 4: INCOME PER SHARE
The following table presents the basis of the income per share computation:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 25, JUNE 26, JUNE 25, JUNE 26,
2006 2005 2006 2005
-------- -------- -------- --------
(IN THOUSANDS)
Numerator for basic income per share:
Income from continuing operations $21,524 $ 8,858 $36,464 $16,240
Loss from discontinued operations -- 1,144 (1,330) 405
Gain (loss) on disposal of discontinued operations -- 8,763 (4,298) 15,163
------- ------- ------- -------
Net income $21,524 $18,765 $30,836 $31,808
======= ======= ======= =======
Numerator for diluted income per share:
Income from continuing operations $21,524 $ 8,858 $36,464 $16,240
Tax-effected interest expense on convertible
subordinated debentures 678 678 1,355 1,355
------- ------- ------- -------
Adjusted income from continuing operations 22,202 9,536 37,819 17,595
Loss from discontinued operations -- 1,144 (1,330) 405
Gain (loss) on disposal of discontinued operations -- 8,763 (4,298) 15,163
------- ------- ------- -------
Adjusted net income $22,202 $19,443 $32,191 $33,163
======= ======= ======= =======
Denominator:
Denominator for basic income per share--weighted
average shares 43,036 46,971 42,801 46,989
Effect of dilutive common stock equivalents 6,990 6,501 6,878 6,579
------- ------- ------- -------
Denominator for diluted income per share--adjusted
weighted average shares 50,026 53,472 49,679 53,568
======= ======= ======= =======
NOTE 5: INVENTORIES
The major classes of inventories were as follows:
JUNE 25, DECEMBER 31,
2006, 2005
-------- ------------
(IN THOUSANDS)
Raw materials $ 80,846 $ 67,899
Work-in-process 52,290 43,857
Finished goods 148,811 144,659
Perishable tooling and supplies 4,212 3,977
-------- --------
Gross inventories 286,159 260,392
Obsolescence and other reserves (17,623) (14,911)
-------- --------
Net inventories $268,536 $245,481
======== ========
-8-
..
In pursuit of our goal to better manage all aspects of working capital, and
especially to reduce our reliance on finished goods inventory, we changed our
inventory management process worldwide in the second quarter of 2006. This event
included a change in the parameters we apply to our allowances for excess and
obsolete inventories. Because of this action, we recognized a pretax charge of
$8.2 million in cost of sales during the current quarter to increase our
allowances for excess and obsolete inventories. The effect of this change in
estimate of excess and obsolete inventories on income from continuing operations
and income per diluted share from continuing operations was $5.4 million during
the current quarter and $.11 per share in both the current quarter and the first
half of 2006, respectively.
NOTE 6: LONG-LIVED ASSETS
During the second quarter of 2006, we identified certain tangible long-lived
assets related to our manufacturing facility in Tompkinsville, Kentucky that
would no longer be utilized due to our decision to close that facility in late
2007. We estimated the fair market value of those tangible long-lived assets
based upon anticipated net proceeds from their use and eventual sale and
recognized an impairment loss of $2.4 million in the Belden Americas segment
based on the difference between the carrying value of those assets and their
aggregate estimated fair market value.
We recognized total depreciation expense of $8.2 million, $20.0 million, $8.3
million, and $16.6 million during the three- and six-month periods ended June
25, 2006 and June 26, 2005, respectively. These amounts included depreciation
expense related to our discontinued operation in Manchester, United Kingdom
totaling $2.7 million, $0.4 million, and $0.9 million during the six months
ended June 25, 2006 and the three- and six-month periods ended June 26, 2005,
respectively.
In the third quarter of 2005, we announced our decisions to exit the United
Kingdom communications cable market and to restructure European operations in an
effort to reduce manufacturing floor space and overhead. We recognized
accelerated depreciation of $1.3 million in cost of sales during both the three-
and six-month periods ended June 25, 2006 related to these decisions.
We recognized amortization expense related to our intangible assets of $0.7
million, $1.3 million, $0.7 million, and $2.1 million during the three- and
six-month periods ended June 25, 2006 and June 26, 2005, respectively.
NOTE 7: ACCRUED SEVERANCE AND OTHER TERMINATION BENEFITS
North America Restructuring
In the second quarter of 2006, we announced our decision to restructure certain
North American operations in an effort to increase our manufacturing presence in
lower-labor-cost regions near our major markets, starting with the planned
construction of a new manufacturing facility in Nogales, Mexico and upcoming
closures of manufacturing facilities in Tompkinsville, Kentucky and Ft. Mill,
South Carolina. We expect to recognize estimated severance and other termination
benefits costs of approximately $3.6 million related to this restructuring
action during 2006-2007. We recognized severance and other termination benefits
costs of $0.1 million in cost of sales within the Belden Americas segment in the
second quarter of 2006. We notified 68 employees, prior to the end of the
quarter, of the pending terminations as well as the amount of one-time
termination benefits they each should expect to receive.
-9-
Europe Restructuring
In 2005, we announced our decision to restructure certain European operations in
an effort to reduce manufacturing floor space and overhead. We recognized
severance and other termination benefits costs within the Europe segment
totaling $1.8 million ($1.4 million in cost of sales and $0.4 million in
selling, general and administrative (SG&A) expenses) in the second quarter of
2006 and $1.1 million ($0.3 million in costs of sales and $0.8 million in SG&A
expenses) in the first quarter of 2006 related to personnel reductions in
Sweden, the Netherlands, and Germany because of the restructuring. We will
provide contractual termination benefits statutorily defined by the applicable
national governments to 60 employees and will provide special termination
benefits to 2 employees in the Netherlands.
We recognized severance and other related benefits costs within the Europe
segment totaling $7.7 million ($7.5 million in cost of sales and $0.2 million in
SG&A expenses) during the year 2005 related to personnel reductions in the
Netherlands, the Czech Republic, and the United Kingdom because of the
restructuring. We provided contractual termination benefits statutorily defined
by the applicable national governments to 143 employees. We also provided
one-time termination benefits to 1 employee in the United Kingdom.
Belden CDT Merger Restructuring
In 2004, we initiated plans to reduce personnel at several legacy CDT locations
and recognized severance and other related benefits costs of $14.0 million ($6.7
million, $3.3 million, $2.0 million, $1.7 million and $0.3 million in the
financial records of F&A, the Europe segment, the Specialty Products segment,
the Belden Americas segment, and the Asia Pacific segment, respectively). These
costs were recognized as a liability assumed in the Belden CDT merger and were
included in the cost to acquire CDT. The number of employees eligible for
severance payments because of these actions was 233. During 2005, we decided to
terminate certain restructuring plans related to legacy CDT operations because
of improved capacity utilization at those operations. We reduced accrued
severance and other related benefits recorded within the Specialty Products
segment, the Europe segment, and the Belden Americas segment by $0.8 million,
$0.8 million and $0.5 million, respectively, and reduced the portion of the
consideration we had previously allocated to goodwill by this same amount. In
the second quarter of 2006, we further reduced accrued severance and other
related benefits recorded within the Belden Americas segment by $0.3 million and
reduced the portion of the consideration we had previously allocated to goodwill
by this same amount. These 2005 and 2006 actions reduced the number of employees
eligible for severance payments by 104.
Other Programs
During 2004 and 2005, the Company recognized severance and other related
benefits costs because of (1) personnel reductions and the closure of a
manufacturing facility within the Belden Americas segment ($2.8 million in cost
of sales and $0.4 million in SG&A expenses), (2) personnel reductions within the
Europe segment ($9.0 million in cost of sales and $0.5 million in SG&A
expenses), and (3) personnel reductions within the Asia Pacific segment ($0.2
million in SG&A expenses). We notified 236 employees, prior to the end of the
respective quarter in which the costs were recognized, of the pending
terminations as well as the amount of one-time termination benefits they each
should expect to receive.
We anticipate making substantially all severance payments against these accruals
within one year of each accrual date.
-10-
The following table sets forth severance activity that occurred during the
three- and six-month periods ended June 25, 2006:
NORTH AMERICA EUROPE BELDEN CDT MERGER DISCONTINUED OTHER
RESTRUCTURING RESTRUCTURING RESTRUCTURING OPERATIONS PROGRAMS
------------------ ------------------ ------------------ ------------------ ------------------
ACCRUAL EMPLOYEE ACCRUAL EMPLOYEE ACCRUAL EMPLOYEE ACCRUAL EMPLOYEE ACCRUAL EMPLOYEE
ACTIVITY COUNT ACTIVITY COUNT ACTIVITY COUNT ACTIVITY COUNT ACTIVITY COUNT
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except number of employees)
Balance at December 31, 2005 $ -- -- $ 7,698 149 $1,978 69 $ 160 6 $1,143 16
New charges:
One-time termination benefits -- -- -- -- -- -- -- -- 185 5
Contractual termination
benefits -- -- 1,110 55 -- -- -- -- -- --
Special termination benefits -- -- -- -- -- -- -- -- -- --
Cash payments / employee
terminations -- -- (442) (35) (549) (2) (162) (6) (178) (7)
Foreign currency translation -- -- 181 -- 24 -- 2 -- 4 --
Other adjustments -- -- -- -- -- -- -- -- (7) --
---- --- ------- --- ------ --- ----- --- ------ ---
Balance at March 26, 2006 -- -- 8,547 169 1,453 67 -- -- 1,147 14
New charges:
One-time termination benefits 141 68 -- -- -- -- -- -- 333 12
Contractual termination
benefits -- -- 1,320 5 -- -- -- -- --
Special termination benefits -- -- 432 2 -- -- -- -- --
Cash payments / employee
terminations -- -- (5,802) (84) (50) (1) -- -- (538) (10)
Foreign currency translation -- -- 225 -- 53 -- -- -- 24 --
Other adjustments -- -- -- -- (250) (28) -- -- (41) --
---- --- ------- --- ------ --- ----- --- ------ ---
Balance at June 25, 2006 $141 68 $ 4,722 92 $1,206 38 $ -- -- $ 925 16
==== === ======= === ====== === ===== === ====== ===
We continue to review our business strategies and evaluate further restructuring
actions. This could result in additional severance and other related benefits
charges in future periods.
NOTE 8: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Revolving Credit Facility
We executed a new credit agreement with a group of 8 banks in January 2006. This
new credit agreement provides us with a $165.0 million secured, variable-rate
and revolving credit facility expiring in January 2011. The facility is secured
by our overall cash flow and our assets in the United States. This new agreement
also allows us to increase the facility, at any time and from time to time
(subject to certain restrictions), to an aggregate amount not exceeding $200.0
million. There were no outstanding borrowings at June 25, 2006 under this credit
agreement. We had $154.2 million in borrowing capacity available at June 25,
2006.
-11-
Convertible Subordinated Debentures
At June 25, 2006, we had outstanding $110.0 million of unsecured subordinated
debentures. The debentures are convertible into approximately 6.2 million shares
of common stock, at a conversion price of $17.859 per share, upon the occurrence
of certain events. Holders may surrender their debentures for conversion into
shares of common stock upon satisfaction of any of the conditions listed in Note
14, Long-Term Debt and Other Borrowing Arrangements, to the Consolidated
Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2005. At June 25, 2006, one of these conditions--the closing sale
price of our common stock must be at least 110% of the conversion price for a
minimum of 20 days in the 30 trading-day period prior to surrender--had been
satisfied. To date, no holders of the debentures have surrendered their
debentures for conversion into shares of our common stock. The 6.2 million
shares of common stock that would be issued if the debentures were converted are
included in our calculations of diluted income per share.
NOTE 9: INCOME TAXES
Tax expense of $22.0 million for the six months ended June 25, 2006 resulted
from income from continuing operations before taxes of $58.4 million. The
difference between the effective rate reflected in the provision for income
taxes on income from continuing operations before taxes and the amounts
determined by applying the applicable statutory United States tax rate for the
six months ended June 25, 2006 are analyzed below:
SIX MONTHS ENDED JUNE 25, 2006 AMOUNT RATE
------------------------------ ------- ----
(IN THOUSANDS,
EXCEPT RATE DATA)
Provision at statutory rate $20,452 35.0%
State income taxes 1,362 2.3%
Change in valuation allowance 946 1.6%
Lower foreign tax rates and other, net (788) (1.3%)
------- ----
Total tax expense $21,972 37.6%
======= ====
-12-
NOTE 10: PENSION AND OTHER POSTRETIREMENT OBLIGATIONS
The following table provides the components of net periodic benefit costs for
our pension and other postretirement benefits plans:
PENSION OBLIGATIONS OTHER POSTRETIREMENT OBLIGATIONS
----------------------------- --------------------------------
JUNE 25, 2006 JUNE 26, 2005 JUNE 25, 2006 JUNE 26, 2005
------------- ------------- ------------- -------------
(IN THOUSANDS)
THREE MONTHS ENDED
Service cost $ 1,640 $ 1,977 $ 181 $ 129
Interest cost 2,116 3,191 620 577
Expected return on plan assets (2,483) (3,533) -- --
Amortization of prior service cost (10) (10) (27) (27)
Net loss recognition 563 843 189 155
------- ------- ------ ------
Net periodic benefit cost $ 1,826 $ 2,468 $ 963 $ 834
======= ======= ====== ======
SIX MONTHS ENDED
Service cost $ 3,369 $ 4,709 $ 355 $ 241
Interest cost 4,313 6,631 1,223 1,173
Expected return on plan assets (5,030) (7,436) -- --
Amortization of prior service cost (20) (20) (54) (54)
Net loss recognition 1,163 1,742 376 310
------- ------- ------ ------
Net periodic benefit cost $ 3,795 $ 5,626 $1,900 $1,670
======= ======= ====== ======
NOTE 11: SHARE-BASED COMPENSATION PLANS
On January 1, 2006, we adopted SFAS No. 123 (as revised in 2004 and referred to
as SFAS No. 123(R)), Share-Based Payment, using the modified prospective method.
Results for prior periods have not been restated.
Our operating results and cash flows for the three- and six-month periods ended
June 25, 2006 differ from operating results and cash flows that would have
resulted had we continued to account for share-based compensation plans using
the intrinsic-value method by the following amounts:
HIGHER (LOWER)
-------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 25, 2006 JUNE 25, 2006
------------------ ----------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Income from continuing operations before taxes $ (431) $ (966)
Income from continuing operations (269) (603)
Net income (269) (603)
Net income per basic share (0.01) (0.01)
Net income per diluted share (0.01) (0.01)
Cash provided by operating activities (2,709) (3,668)
Cash provided by financing activities 2,709 3,668
-13-
Compensation cost charged against income and the income tax benefit recognized
for our share-based compensation arrangements is included below:
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 25, 2006 JUNE 26, 2005 JUNE 25, 2006 JUNE 26, 2005
------------- ------------- ------------- -------------
(IN THOUSANDS)
Total share-based compensation cost charged to
SG&A expenses $1,036 $939 $2,246 $1,401
Income tax benefit 390 361 844 538
The following table illustrates the effect on net income and net income per
share if we had accounted for stock options using the fair value method in the
three- and six-month periods ended June 26, 2005. For purposes of this pro forma
disclosure, the value of the options is estimated using a Black-Scholes-Merton
option-pricing formula and amortized to expense over the options' vesting
periods.
THREE MONTHS ENDED JUNE 26, 2005 SIX MONTHS ENDED JUNE 26, 2005
-------------------------------- ------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Share-based employee compensation cost, net of tax $ 578 $ 746 $ 910 $ 1,080
Net income 18,765 18,597 31,808 31,638
Basic net income per share 0.40 0.40 0.68 0.67
Diluted net income per share 0.36 0.36 0.62 0.62
We currently have outstanding stock appreciation rights (SARS), stock options,
restricted stock shares and restricted stock units with service vesting
conditions, and restricted stock units with performance vesting conditions. SARs
may be converted into shares of our common stock in equal amounts on each of the
first 3 anniversaries of the grant date and expire 10 years from the grant date.
We grant stock options with an exercise price equal to the market price of our
common stock on the grant date. Stock options become exercisable in equal
amounts on each of the first 3 anniversaries of the grant date and expire 10
years from the grant date. Certain awards provide for accelerated vesting if
there is a change in control of the Company. Both restricted stock shares and
units with service conditions "cliff vest" in either 3 or 5 years from the grant
date. Restricted stock units with performance conditions begin to vest upon
satisfaction of certain financial performance conditions on the first
anniversary of their grant date and then vest ratably on the second and third
anniversaries of their grant date. If the financial performance conditions are
not satisfied, the restricted stock units will be forfeited. We believe it is
probable that the performance vesting conditions will be satisfied.
We recognize compensation cost for all awards based on their fair values. The
fair values for SARs and stock options are estimated on the grant date using the
Black-Scholes-Merton option-pricing formula which incorporates the assumptions
noted in the following table. We developed the expected term assumption using
our historical exercise and post-vesting cancellation experience. We developed
the expected volatility assumption using our monthly historical price data and
other economic data trended into future years. The fair value of restricted
stock shares and units is the market price of our common stock on the date of
grant. Compensation costs for awards with service conditions are amortized to
expense using the straight-line method. Compensation costs for awards with
performance conditions are amortized to expense using the graded attribution
method.
-14-
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 25, 2006 JUNE 26, 2005 JUNE 25, 2006 JUNE 26, 2005
------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT WEIGHTED AVERAGE FAIR VALUE AND ASSUMPTIONS)
Weighted-average fair value of SARs and
options granted $ 14.08 $ 4.55 $ 11.13 $ 4.55
Total intrinsic value of SARs converted
and options exercised 7,305 219 9,585 897
Cash received for options exercised 13,875 556 20,793 2,615
Excess tax benefits realized from SARs
converted and options exercised 2,709 -- 3,668 --
Weighted-average fair value of
restricted stock shares and units
granted 30.90 -- 27.80 --
Total fair value of restricted stock
shares and units vested -- 1,423 683 2,416
Expected volatility 36.92% 38.48% 36.92% 38.41%
Expected term (in years) 6.5 7.0 6.5 7.0
Risk-free rate 4.99% 3.90% 4.51% 4.29%
Dividend yield 0.64% 7.46% 0.77% 6.45%
RESTRICTED
SARS AND STOCK OPTIONS SHARES AND UNITS
--------------------------------------------- -------------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
AVERAGE REMAINING AGGREGATE AVERAGE
EXERCISE CONTRACTUAL INTRINSIC GRANT-DATE
NUMBER PRICE TERM VALUE NUMBER FAIR VALUE
------- --------- ----------- --------- ------ ----------
(IN THOUSANDS, EXCEPT EXERCISE PRICES, FAIR VALUES, AND CONTRACTUAL TERMS)
Outstanding at January 1, 2006 4,548 $24.06 222 $20.16
Granted 315 25.93 132 27.80
Exercised or converted (1,046) 20.02 (33) 20.69
Forfeited or expired (276) 29.89 (2) 20.50
------ ------ --- ------
Outstanding at June 25, 2006 3,541 $24.89 5.2 $17,943 319 $23.26
====== ====== ==== ======= === ======
Vested or expected to vest at June 25, 2006 3,508 $24.90 5.1 $17,748
Exercisable or convertible at June 25, 2006 2,534 25.87 3.7 10,346
At June 25, 2006, the total unrecognized compensation cost related to all
nonvested awards was $13.0 million. That cost is expected to be recognized over
a weighted-average period of 2.8 years.
Historically, we have issued treasury shares, if available, to satisfy award
conversions and exercises.
NOTE 12: CONTINGENT LIABILITIES
General
Various claims are asserted against us in the ordinary course of business
including those pertaining to income tax examinations and product liability,
customer, employment, vendor and patent matters. Based on facts currently
available, management believes that the disposition of the claims that are
pending or asserted will not have a materially adverse effect on our financial
position, results of operations or cash flow.
-15-
Letters of Credit, Bank Guaranties and Surety Bonds
At June 25, 2006, we were party to unused standby letters of credit, unused bank
guaranties and surety bonds totaling $10.9 million, $4.7 million, and $3.9
million, respectively.
Severance and Other Related Benefits
We completed the sale of part of our business in Germany to a management-led
buyout group in October 2003. We will retain liability for severance and other
termination benefits estimated at $0.9 million on June 25, 2006 in the event the
buyout group terminates transferred employees within three years of the buyout
date. We will be relieved of any remaining contingent liability related to the
transferred employees on the third anniversary of the buyout date.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We design, manufacture and market high-speed electronic cables, connectivity
products and related items for the specialty electronics and data networking
markets. We report our operating results in four reportable segments. We
consider revenue growth, operating margin, and working capital management to be
our key operating performance indicators.
The following trends and events arising during 2006 have had a significant
effect on our financial condition, results of operations and cash flows during
the current year.
Increased Raw Materials Costs
The principal raw materials we use in many of our products are copper and
plastics derived from petrochemical feedstocks. During the past two years, the
prices of these raw materials have risen significantly and rapidly. Generally,
we have recovered much of the higher cost of raw materials through higher
pricing of our finished products. The majority of our products are sold through
channel partners, and we manage the pricing of these products through published
price lists which we update from time to time, with new prices generally taking
effect a few weeks after they are announced. Some original equipment
manufacturer customer contracts have provisions which allow us to pass on raw
material cost increases, generally with a lag of a few weeks to three months.
Because our inventory is valued on a first in, first out basis, our gross profit
for the current year benefited by an estimated $6.0 million to $8.0 million,
predominantly in the second quarter, due to the difference between the raw
materials costs flowing out with sales and the raw materials costs implied in
our current pricing.
Restructuring Activities
In 2005, we announced our decisions to exit the United Kingdom communications
cable market and restructure certain European operations in an effort to reduce
manufacturing floor space and overhead and to streamline administrative
processes. In 2006, we sold certain assets and liabilities of our communications
cable operation in the United Kingdom and announced the upcoming closure of a
plant in Sweden. As a result of these decisions, we recognized severance expense
of $2.9 million ($1.8 million in the current quarter) and accelerated
depreciation of $1.3 million in the current year.
-16-
In the second quarter of 2006, we announced our decision to restructure certain
North American operations in an effort to increase our manufacturing presence in
low-cost regions near our major markets, starting with the planned construction
of a new plant in Mexico and upcoming closures of two plants in the United
States. As a result of these decisions, we recognized asset impairment expense
of $2.4 million and severance expense of $0.1 million during the current
quarter.
We may recognize additional restructuring costs during 2006-2007 (including
estimated severance and other termination benefits costs associated with the
North America restructuring activities of approximately $3.5 million). We may
also recognize additional asset impairment expenses or losses on the disposal of
assets during the restructuring periods.
Working Capital Management
In pursuit of our goal to better manage all aspects of working capital, and
especially to reduce our reliance on finished goods inventory, we have changed
our inventory management process worldwide. This event included a change in the
parameters we apply to our allowances for excess and obsolete inventories.
Because of this action, we recognized a pretax charge of $8.2 million in cost of
sales during the current quarter to increase our allowances for excess and
obsolete inventories.
RESULTS OF OPERATIONS
CONSOLIDATED CONTINUING OPERATIONS
Three Months Ended Six Months Ended
----------------------------- % ----------------------------- %
June 25, 2006 June 26, 2005 Change June 25, 2006 June 26, 2005 Change
------------- ------------- ------ ------------- ------------- ------
(in thousands, except
percentages)
Revenues $409,568 $311,438 31.5% $731,473 $597,706 22.4%
Gross profit 92,177 72,276 27.5% 165,592 135,061 22.6%
Operating income 36,803 16,359 125.0% 63,759 31,010 105.6%
Income from continuing operations
before taxes 34,494 13,590 153.8% 58,436 25,072 133.1%
Income from continuing operations 21,524 8,858 143.0% 36,464 16,240 124.5%
Revenues generated in the three- and six-month periods ended June 25, 2006
increased from revenues generated in the three- and six-month periods ended June
26, 2005 because of increased selling prices, increased sales volume and
favorable foreign currency translation on international revenues. Price
improvement resulted primarily from the impact of sales price increases we
implemented during 2005-2006 across most product lines in response to increases
in the costs of copper and commodities derived from petrochemical feedstocks and
improved pricing practices at certain of our operations. Price improvement
contributed approximately 20.3 and 15.6 percentage points of the revenue
increase in the three- and six-month periods ended June 25, 2006. During the
current quarter, higher unit sales of products delivered into each of our four
served markets contributed approximately 9.9 percentage points of revenue
increase. During the six months ended June 25, 2006, higher unit sales of
products with industrial, video/sound/security (VSS), and transportation/defense
(TD) applications were partially offset by a volume decrease in sales of
products with communications/networking (CN) applications, but still contributed
approximately 6.7 percentage points of revenue increase. Unit sales of products
with industrial, VSS, and TD applications improved because facilities
manufacturing these products improved their order fill rates and reduced their
backlog. Unit sales of products with CN applications deteriorated in the first
quarter of 2006 as customers purchased less costly alternatives following our
implementation of increased sales prices in that quarter; however, our unit
sales improved in the second quarter of 2006
-17-
when many competitors also raised their selling prices. Favorable currency
translation contributed 1.3 and 0.1 percentage points of revenue increase in the
three- and six-month periods ended June 25, 2006.
Gross profit increased in the three- and six-month periods ended June 26, 2005
from comparable periods in the prior year primarily because of the volume
increase discussed above. Higher cost of sales in the current quarter resulted
not only from an increase in variable production costs necessary to support
improved unit sales of product, but also from the increase in certain raw
materials costs, increased excess and obsolete inventory charges totaling $8.2
million, and severance and other termination benefits costs resulting primarily
from restructuring actions that exceeded those recognized in the second quarter
of 2005 by $1.3 million. Higher cost of sales in the six months ended June 25,
2006 resulted from increased variable production costs necessary to support
improved units sales of product, an increase in certain raw materials costs, the
increased excess and obsolete inventory charges mentioned above, severance and
other termination benefits costs resulting primarily from restructuring actions
that exceeded those recognized in the first six months of 2005 by $1.2 million,
and accelerated depreciation totaling $1.3 million also related to the
restructuring actions. These negative factors impacting the gross profit
comparisons were partially offset by the positive impact of manufacturing cost
reduction initiatives, primarily the closure of three plants in the second
quarter of 2005. Additional discussion regarding the events and trends that
significantly impacted gross profit is included in the section entitled
"Overview" in Item 2 of this Quarterly Report on Form 10-Q.
Operating income increased in the three- and six-month periods ended June 25,
2006 from comparable periods in the prior year because of higher gross profit
and a decrease in SG&A expenses partially offset by asset impairment totaling
$2.4 million related to the North America restructuring actions. SG&A expenses
decreased by $2.9 million and $4.6 million in the three- and six-month periods
ended June 25, 2006 from comparable periods in 2005 primarily because of the
impact of cost reduction initiatives (including 2005 personnel reductions),
nonrecurring executive succession costs recognized in the second quarter of 2005
totaling $5.1 million, and nonrecurring merger-related costs totaling $0.6
million and $2.2 million recognized in the three- and six- month periods ended
June 26, 2005. These positive factors impacting the operating income comparison
were partially offset by severance and other termination benefits costs
resulting primarily from restructuring actions in the three- and six-month
periods ended June 25, 2006 that exceeded those recognized in comparable periods
in 2005 by $0.7 million and $1.4 million, respectively, and share-based
compensation costs recognized in the three- and six-month periods ended June 25,
2006 that exceeded those recognized in comparable periods in the prior year by
$0.3 million and $0.9 million, respectively, due to the 2006 adoption of SFAS
No. 123(R). Additional discussion regarding the events and trends that
significantly impacted operating income is included in the section entitled
"Overview" in Item 2 of this Quarterly Report on Form 10-Q.
The Company's effective annual tax rate changed from 34.8% and 35.2% in the
three- and six-month periods ended June 26, 2005 to 37.6% in both the three- and
six-month periods ended June 25, 2006. These changes are primarily attributable
to an increase in the deferred tax asset valuation allowance, the smaller
relative benefit of permanent deductions to larger pretax income amounts, and
increasing amounts of income generated in higher tax rate jurisdictions.
Income from continuing operations increased in the three- and six-month periods
ended June 25, 2006 from the comparable periods in the prior year because of
higher operating income partially offset by higher income tax expense.
-18-
BELDEN AMERICAS SEGMENT
Three Months Ended Six Months Ended
----------------------------- % ----------------------------- %
June 25, 2006 June 26, 2005 Change June 25, 2006 June 26, 2005 Change
------------- ------------- ------ ------------- ------------- ------
(in thousands, except
percentages)
Total revenues $238,632 $175,673 35.8% $428,910 $336,059 27.6%
Operating income 37,796 20,912 80.7% 68,829 37,556 83.3%
as a percent of total revenues 15.8% 11.9% 16.0% 11.2%
Belden Americas total revenues (which includes affiliate revenues) increased in
the three- and six-month periods ended June 25, 2006 from comparable periods in
2005 primarily because of increased selling prices, increased sales volume, and
favorable foreign currency translation on international revenues. Price
improvement resulted primarily from the impact of sales price increases we
implemented during 2005-2006 across most product lines in response to increased
raw materials costs and improved pricing practices at certain of our operations.
Higher unit sales resulted from increased demand from customers in the fossil
fuels, power generation, and broadcast industries coupled with improved order
fill rates and reduced backlog at plants manufacturing these products. Operating
income increased in the three- and six-month periods ended June 25, 2006 from
comparable periods in the prior year primarily because of improved sales volume
and price realization in some of our stronger businesses, certain customers
purchasing product sooner than required in advance of announced selling price
increases, improved factory utilization and cost absorption that resulted from
both the 2005 restructuring actions and rising demand, and the impact of 2005
cost reduction initiatives (including a plant closure in the second quarter of
2005). These positive factors affecting the operating income comparison were
partially offset by increased variable production costs necessary to support
improved unit sales of product, rising raw materials costs, asset impairment
charges of $2.4 million recognized in the second quarter of 2006 related to the
restructuring actions, and additional excess and obsolete inventory charges
totaling $1.5 million.
SPECIALTY PRODUCTS SEGMENT
Three Months Ended Six Months Ended
----------------------------- % ----------------------------- %
June 25, 2006 June 26, 2005 Change June 25, 2006 June 26, 2005 Change
------------- ------------- ------ ------------- ------------- ------
(in thousands, except
percentages)
Total revenues $82,427 $65,988 24.9% $148,515 $123,962 19.8%
Operating income 9,498 8,622 10.2% 16,400 16,050 2.2%
as a percent of total revenues 11.5% 13.1% 11.0% 12.9%
Specialty Products total revenues increased in the three- and six-month periods
ended June 25, 2006 from comparable periods in 2005 primarily because of
increased selling prices. Price improvement resulted primarily from the impact
of sales price increases we implemented during 2005-2006 across most product
lines in response to increased raw materials costs and improved pricing
practices at certain of our operations manufacturing networking products.
Operating income increased in the three- and six-month periods ended June 25,
2006 from comparable periods in the prior year primarily because of improved
revenues partially offset by rising raw material costs and additional excess and
obsolete inventory charges recognized in the second quarter of 2006 totaling
$4.7 million.
-19-
EUROPE SEGMENT
Three Months Ended Six Months Ended
----------------------------- % ----------------------------- %
June 25, 2006 June 26, 2005 Change June 25, 2006 June 26, 2005 Change
------------- ------------- ------ ------------- ------------- ------
(in thousands, except percentages)
Total revenues $102,374 $87,350 17.2% $ 177,522 $167,899 5.7%
Operating income (loss) 69 2,748 -97.5% (1,071) 3,467 -130.9%
as a percent of total revenues 0.1% 3.1% -0.6% 2.1%
Europe total revenues increased in the three- and six- month periods ended June
25, 2006 from comparable periods in the prior year primarily because of
increased selling prices and increased sales volume. For the six months ended
June 25, 2006, these favorable factors were partially offset by unfavorable
foreign currency translation on international revenues. Price improvement
resulted primarily from the impact of sales price increases we implemented
during 2005-2006 across most product lines in response to increased raw
materials costs. Higher unit sales resulted from increased demand for products
with automotive, broadband, and telecommunications applications. Europe
operating results declined in the three- and six-month periods ended June 25,
2006 from comparable periods in 2005 primarily because of increased variable
production costs necessary to support improved unit sales of product, rising raw
materials costs, severance and other termination benefits costs resulting
primarily from restructuring actions in the three- and six-month periods ended
June 25, 2006 that exceeded those recognized in comparable periods in 2005 by
$1.8 million and $2.9 million, respectively, additional excess and obsolete
inventory charges recognized in the second quarter of 2006 totaling $2.0
million, and accelerated depreciation of $1.3 million recognized in the first
quarter of 2006.
ASIA PACIFIC SEGMENT
Three Months Ended Six Months Ended
----------------------------- % ----------------------------- %
June 25, 2006 June 26, 2005 Change June 25, 2006 June 26, 2005 Change
------------- ------------- ------ ------------- ------------- ------
(in thousands, except percentages)
Total revenues $15,655 $12,825 22.1% $28,464 $23,805 19.6%
Operating income 1,480 434 241.0% 2,933 529 454.4%
as a percent of total revenues 9.5% 3.4% 10.3% 2.2%
Asia Pacific total revenues increased in the three- and six-month periods ended
June 25, 2006 from comparable periods in 2005 primarily because of increased
sales volume and increased selling prices. Higher unit sales resulted from
increased demand for products in all our served markets primarily because of
improvement in sales representation over the past year and certain customers
purchasing product sooner than required in advance of announced selling price
increases. Sales price increases were implemented during 2005-2006 in response
to rising raw material costs. Operating income increased during the three- and
six-month periods ended June 25, 2006 from comparable periods in the prior year
primarily because of the favorable revenue comparison.
Additional discussion regarding the events and trends that significantly
impacted revenues and operating income for all our operating segments is
included in the section entitled "Overview" in Item 2 of this Quarterly Report
on Form 10-Q.
-20-
DISCONTINUED OPERATIONS
During each of the periods presented we reported the operations listed in Note
3, Discontinued Operations, to the Consolidated Financial Statements as
discontinued operations. Loss from discontinued operations for the six months
ended June 25, 2006 included $27.6 million of revenues and $1.9 million of loss
before income tax benefits. We recognized a loss on the disposal of discontinued
operations in the amount of $6.1 million before tax ($4.3 million after tax)
during the first half of 2006 related to our operation in Manchester, United
Kingdom. Gain from discontinued operations for the quarter ended June 26, 2005
included $26.4 million of revenues and $1.5 million of gain before income tax
expense. Gain from discontinued operations for the six months ended June 26,
2005 included $51.2 million of revenues and $0.3 million of gain before income
tax expense. We recognized gains on the disposal of discontinued operations
related to our Phoenix operation in the amount of $13.7 million before tax ($8.8
million after tax) and $10.0 million before tax ($6.4 million after tax),
respectively, during the second and first quarters of 2005.
At June 25, 2006, the only assets or liabilities belonging to the discontinued
operations that remained as part of the disposal group were accrued liabilities
related to our discontinued operation in Phoenix, Arizona totaling $0.5 million.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Significant factors affecting our cash liquidity include (1) cash provided by
operating activities, dispositions of tangible assets, and the exercise of stock
options, (2) cash used for business acquisitions, capital expenditures, and
dividends, and (3) the adequacy of our available credit facilities and other
borrowing arrangements. We believe the sources listed above are sufficient to
fund the current requirements of working capital, to make scheduled
contributions for our retirement plans, to fund scheduled debt maturity
payments, to fund quarterly dividend payments, and to support our short-term
operating strategies. Customer demand, competitive market forces, commodities
pricing, uncertainties related to the effect of competitive products and
pricing, customer acceptance of our product mix or economic conditions worldwide
could affect our ability to continue to fund our future needs from business
operations.
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities in the first six months of 2006
totaled $16.2 million and included $27.5 million of non-cash operating expenses
and a $42.1 million net increase in operating assets and liabilities. Non-cash
operating expenses consisted of depreciation, amortization, asset impairment,
deferred tax expense, share-based compensation, and a loss on the disposal of
tangible assets partially offset by pension funding in excess of pension
expense. The net increase in operating assets and liabilities resulted primarily
from increased receivables, increased inventories, and decreased current income
tax liabilities partially offset by increased accounts payable and accrued
liabilities and decreased other net operating assets and liabilities.
-21-
Receivables and inventories increased from December 31, 2005 to June 25, 2006
mainly because of higher sales levels and increased costs for copper and
commodities derived from petrochemical feedstocks. Days sales outstanding in
receivables increased from December 31, 2005 to June 25, 2006 primarily because
of seasonality in the collection process (December is historically our strongest
collection month). Inventory turns at June 25, 2006 was largely unchanged from
December 31, 2005. Current income tax liability decreased from December 31, 2005
to June 25, 2006 as the result of payments we made against our 2005 liability in
the first quarter of 2006. Accounts payable and accrued liabilities increased
from December 31, 2005 to June 25, 2006 primarily because of a significant
increase in trade accounts payable resulting from higher raw materials pricing.
Days cost of sales in payables increased from December 31, 2005 to June 25, 2006
as a result of our working capital management initiatives.
CASH FLOW FROM INVESTING ACTIVITIES
Net cash provided by investing activities totaled $22.9 million in the first six
months of 2006. We received proceeds on the sale of certain tangible assets
totaling $30.2 million (including $28.6 million on the sale of certain tangible
assets of our discontinued Manchester, United Kingdom operation) during the
current year. This cash source was partially offset by capital expenditures
totaling $7.3 million during the current year.
CASH FLOW FROM FINANCING ACTIVITIES
Net cash provided by financing activities during the first six months of 2006
totaled $19.1 million. During the current year, we received proceeds from the
exercise of stock options totaling $20.8 million and recognized excess tax
benefits related to share-based compensation in the amount of $3.7 million.
These cash sources were partially offset by the payment of dividends of $.10 per
share to stockholders during the year, which resulted in cash outflow of $4.3
million, and the payment of debt issuance costs in the amount of $1.1 million.
CAPITAL RESOURCES
Our capital structure consists primarily of current maturities of long-term
debt, long-term debt and stockholders' equity. Capitalization increased 7.6%
during the first six months of 2006 because of an increase in stockholders'
equity.
The agreements for our revolving credit facility and medium-term notes contain
various customary affirmative and negative covenants and other provisions,
including restrictions on the incurrence of debt, maintenance of a maximum
leverage ratio, maintenance of a fixed charge coverage ratio, and minimum net
worth. We were in compliance with these covenants at June 25, 2006.
Additional discussion regarding our various borrowing arrangements is included
in Note 8, Long-Term Debt and Other Borrowing Arrangements, to the Consolidated
Financial Statements in this Quarterly Report on Form 10-Q.
Stockholders' equity increased by 10.1% from December 31, 2005 to June 25, 2006
primarily because of increases in additional paid-in capital and retained
earnings and improvement in accumulated other comprehensive income. Additional
paid-in capital increased primarily because of stock option exercises. Retained
earnings increased primarily because of net income partially offset by
dividends. Accumulated other comprehensive income improved primarily because of
the positive effect of currency exchange rates on financial statement
translation.
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OFF-BALANCE SHEET ARRANGEMENTS
We were not a party to any off-balance sheet arrangements at June 25, 2006.
IMPACT OF NEWLY ISSUED ACCOUNTING STANDARDS
Discussion regarding our pending adoption of Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109, is included in Note 1, Summary of
Significant Accounting Policies, to the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
During the three- and six- month periods ended June 25, 2006:
- We did not change any of our existing critical accounting policies;
- No existing accounting policies became critical accounting policies
because of an increase in the materiality of associated transactions
or changes in the circumstances to which associated judgments and
estimates relate;
- There were no significant changes in the manner in which critical
accounting policies were applied or in which related judgments and
estimates were developed, except for our change in estimate regarding
allowances for excess and obsolete inventories, as described below;
and
- We did adopt one new critical accounting policy, share-based
compensation, as described below.
Allowances for Excess and Obsolete Inventories
In the second quarter of 2006, we changed the parameters we apply to our
allowances for excess and obsolete inventories. Further discussion regarding
this change is included in the section entitled "Overview" in Item 2 of this
Quarterly Report on Form 10-Q.
Share-Based Compensation
We compensate certain employees with various forms of share-based payment
awards--stock appreciation rights, stock options, restricted stock units, and
performance stock units. We recognize compensation cost for SARs and stock
options based on the fair values of these awards. These fair values are
estimated on the grant date using the Black-Scholes-Merton option-pricing
formula which incorporates certain assumptions regarding the expected term of an
award, stock volatility, dividend yield, and risk-free interest rates. We
developed the expected term assumption based on the vesting period and
contractual term of an award, our historical exercise and post-vesting
cancellation experience, our stock price history, our expected volatility, known
blackout periods that may trigger automatic early exercise or delay exercise,
plan provisions that require exercise or cancellation of awards after employees
terminate, and the extent to which currently available information indicates
that the future is reasonably expected to differ from past experience. We
develop the expected volatility assumption based on monthly historical price
data for our stock as well as the stock of legacy Belden and legacy CDT
separately and other economic data trended into future years, information about
our corporate and capital structure, and the extent to which currently available
information indicates that future volatility is reasonably expected to differ
from historical volatility. The dividend yield is the ratio of historical
per-annum dividends paid per share of our common stock to the market price of
our common stock on the grant date. The assumption made with regard to dividend
yield is that current dividend payment practices will continue in the future.
The risk-free rate is the implied yield currently available on United States
Treasury zero-coupon issues
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with a remaining term equal to the expected term used as the assumption in the
valuation model. After calculating the aggregate fair value of an award, we use
an estimated forfeiture rate to discount the amount of share-based payments
compensation cost to be recognized in our operating results over the service
period of the award. We developed the forfeiture assumption based on our
historical pre-vesting cancellation experience.
Discussion regarding the adoption of SFAS No. 123(R) is included in Note 11,
Share-Based Compensation Plans, to the Consolidated Financial Statements in this
Quarterly Report on Form 10-Q.
OUTLOOK
Operating Results
Although we remain in a volatile material cost environment and it continues to
be a challenge to manage pricing so as to maintain our profitability, we expect
the general economic conditions in our served markets to remain healthy in the
second half of the year. We expect diluted earnings per share from continuing
operations for the third quarter between $.43 and $.48; however, further charges
related to our ongoing restructuring initiatives might reduce that estimate. We
expect that our diluted earnings per share from continuing operations for the
year will be between $1.62 and $1.72. This range includes estimated
restructuring charges of $.13 for the year.
Cash Flows
During the second half of 2006, we plan to pay off tranches of both our 1997 and
1999 medium-term notes totaling $59.0 million, purchase additional capital
equipment totaling approximately $18.0 million, fund pension and other
postretirement benefit obligations totaling approximately $14.3 million, fund
executive succession, severance, and other termination benefits obligations
totaling $7.5 million, and fund dividends of $.10 per common share, or
approximately $4.5 million. We anticipate we will have sufficient funds to
satisfy these cash requirements.
FORWARD-LOOKING STATEMENTS
The statements set forth in this report other than historical facts, including
those noted in the "Outlook" section, are forward-looking statements made in
reliance upon the safe harbor of the Private Securities Litigation Reform Act of
1995. As such, they are based on current expectations, estimates, forecasts and
projections about the industries in which we operate, general economic
conditions, and our beliefs and assumptions. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions,
which are difficult to predict. As a result, our actual results may differ
materially from what is expected or forecasted in such forward-looking
statements. We disclaim any duty to update any forward-looking statements as a
result of new information, future developments, or otherwise.
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Our actual results may differ materially from such forward-looking statements
for the following reasons:
- Demand and acceptance of our products by customers and end users;
- Changes in the cost and availability of raw materials (specifically,
copper, commodities derived from petrochemical feedstocks, and other
materials);
- the degree to which we will be able to compensate for rising costs
through the pricing of our products;
- Energy costs;
- The ability to successfully implement our announced restructuring
plans; and
- Other factors noted in this report and our other Securities Exchange
Act of 1934 filings.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Item 7A, Quantitative and Qualitative Disclosures about Market Risks, of our
Annual Report on Form 10-K for the year ended December 31, 2005 provides more
information as to the types of practices and instruments we use to manage market
risks. There were no material changes in our exposure to market risks since
December 31, 2005 other than increases in certain raw materials costs discussed
in the section entitled "Overview" in Item 2 of this Quarterly Report on Form
10-Q.
ITEM 4: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of the principal executive
officer and principal financial officer, of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934). Based on this evaluation, the principal executive officer
and principal financial officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this report.
There was no change in our internal control over financial reporting during our
most recently completed fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
We are a party to various legal proceedings and administrative actions that are
incidental to our operations in which the claimant alleges injury from exposure
to heat-resistant asbestos fiber, generally contained in a small number of
products manufactured by our predecessors. These proceedings include personal
injury cases (about 149 of which we were aware at July 31, 2006) in which we are
one of many defendants, 8 of which are scheduled for trial during 2006.
Electricians have filed a majority of these cases, primarily in New Jersey and
Pennsylvania. Plaintiffs in these cases generally seek compensatory, special and
punitive damages. Through July 31, 2006, we have been dismissed (or reached
agreement to be dismissed) in approximately 168 similar cases without any going
to trial, and with only 7 of these involving any payment to the claimant. We
have insurance that we believe should cover a significant portion of any defense
or settlement costs borne by us in these types of cases. In our opinion, the
proceedings and actions in which we are involved should not, individually or in
the aggregate, have a material adverse effect on our results of operations, cash
flows or financial condition.
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ITEM 1A: RISK FACTORS
There have been no material changes with respect to risk factors as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2005.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 24, 2006, the Company held its regular Annual Meeting of Stockholders.
The stockholders considered two proposals. Each proposal was approved.
Proposal 1: Election of 8 directors for a one-year term.
SHARES VOTED FOR SHARES WITHHELD
---------------- ---------------
Lorne D. Bain 33,273,542 7,381,799
Lance C. Balk 30,483,547 10,171,794
Bryan C. Cressey 34,046,291 6,609,050
Michael F.O. Harris 33,317,646 7,337,695
Glenn Kalnasy 32,906,912 7,748,429
John M. Monter 33,246,183 7,409,158
Bernard G. Rethore 32,963,868 7,691,473
John S. Stroup 34,050,742 6,604,599
Proposal 2: Approve increasing the number of awards individual participants may
receive under our 2001 Long-Term Performance Incentive Plan to an annual limit
of 400,000.
SHARES VOTED FOR SHARES WITHHELD ABSTENTIONS
---------------- --------------- -----------
29,984,984 8,217,608 617,726
ITEM 6: EXHIBITS
Exhibit 31.1 Certificate of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certificate of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certificate of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certificate of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BELDEN CDT INC.
Date: August 3, 2006 By: /s/ John S. Stroup
------------------------------------
John S. Stroup
President, Chief Executive Officer
and Director
Date: August 3, 2006 By: /s/ Stephen H. Johnson
------------------------------------
Stephen H. Johnson
Treasurer and Interim Chief
Financial Officer
Date: August 3, 2006 By: /s/ John S. Norman
------------------------------------
John S. Norman
Controller and Chief Accounting
Officer
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